What is Salam in Islamic Banking?

In the realm of Islamic banking and finance, several contract types have been devised to ensure transactions adhere to Shariah principles. The Salam contract, often referred to as ‘Salam financing’ or “بيع سلم” is one such instrument. The Salam contract is defined as a sale where a buyer pays upfront, with the understanding that goods will be delivered at a specific future date. Bai Salam transaction in Islamic finance, predominantly employed for financing farmers and small traders, functions as a vital financial tool for micro banks and financial institutions in supporting small industries. Salam in Islamic banking is often paired with another type of contract called Parallel Salam, to create a more flexible financial solution for buyers and sellers.

1. Elements of Salam Contract:

In a Salam contract, four key elements play a pivotal role: the Buyer, the Seller, the Cash Price, and the Purchased Commodity.


Firstly, the Selling Party represents the individual or entity offering a product or service for a future delivery. Typically, they receive payment upfront, providing them with the necessary capital to fulfill the future delivery of goods.


Transitioning to the second component, the Purchasing Party refers to the individual or entity providing the upfront payment for the future delivery of goods. In the context of Islamic banking, the bank usually takes on this role.


Thirdly, the Advance Payment is an integral part of a Salam contract. The Purchasing Party provides this payment at the start of the contract, offering immediate capital to the Selling Party. This advance payment is an essential aspect of its banking, differentiating it from traditional interest-based loans.


Finally, the Specified Goods represent the products or services that the Selling Party agrees to deliver in the future. These goods must be clearly defined in the contract, including their quantity and quality, to avoid any ambiguity or future disputes. This clear specification of goods within the contract ensures a transparent and fair transaction for both parties.

2. Endorsement of Salam Contract by Shariah:

Fundamentally, the contract is sanctioned in Islam due to its inherent principles of fairness, transparency, and mutual agreement. This type of contract is particularly unique as it allows for the sale of goods that are not yet in existence, providing a mechanism for agricultural and other industries to secure finance in advance. The Prophet Muhammad (PBUH) himself endorsed بيع سلم, provided they clearly defined the quality, quantity, and delivery date of the goods in question. This contributes to the overall integrity and transparency of the transaction.


Moreover, to maintain a balance, the price in this contract should be paid in full at the time of contract execution. This rule, grounded in Islamic principles, is meant to prevent exploitation and protect the interests of the seller. By adhering to these key guidelines, Salam contracts abide by the core tenets of Islamic finance and are thus permitted within the realm of Islamic law.

Parallel Salam:

Once the Salam agreement has been executed with one party, the buyer or seller initiates another Salam contract with a third party. Parallel Salam contract is allowed with third party only. They must be two different and independent contracts, and these two contracts cannot be tied up.

Parallel Salam Example:

Let us understand Parallel Salam with the help of an example:

Bank purchases 500 Bags of Rice from “Ali” through بيع سلم, with full prepayment and to be delivered on June 30th.

  • “Ali” delivered 500 bags of rice to the Bank on June 30th.
  • Bank sells this commodity to a Third-Party, called a “Company” on credit.
  • Upon receiving it on the agreed date, the bank then forwards the delivery to the “Company”.
  • Upon receiving a delivery from the Bank, the “Company” actively commits to a promissory note, agreeing to make payment within a specified timeframe.

Salam Transaction in Islamic Banking:

بيع سلم, predominantly employed for financing farmers and small traders, functions as a vital financial tool for micro banks and financial institutions in supporting small industries. It primarily serves the following purposes:

  • Agriculture financing;
  • Working Capital Financing;
  • Commercial and industrial financing;
  • Export Financing; and;
  • Operations and capital cost financing.

a. Example of Salam in Agriculture Financing

Consider a farmer who requires capital to purchase seeds, fertilizers, and other essentials for an upcoming planting season. However, the farmer lacks immediate resources but can deliver 100 tons of wheat after six months.

  1. Contract Initiation: The farmer and the bank enter into a بيع سلم. The bank commits to paying $100,000 upfront to the farmer for 100 tons of wheat to be delivered at the end of the harvest season.
  2. Salam Transaction: The bank provides the farmer with the entire $100,000 at the inception of the contract, enabling him to procure the necessary agricultural inputs.
  3. Utilization of Funds: The farmer uses the funds to buy seeds, fertilizers, and other essentials. The principle of mutual agreement allows the farmer to decide how best to utilize this capital.
  4. Salam Delivery: On maturity of the contract and completion of the harvest, the farmer delivers 100 tons of wheat to the bank, adhering to the Salam delivery principle.

Thus, the bank provides the farmer with essential capital for agricultural operations while adhering to Islamic banking ethics. Subsequently, the bank can either sell the wheat in the market or engage in a parallel Salam contract to ensure the wheat reaches its final consumers.

b. Example of Salam in Working Capital Financing

Consider a manufacturing company that needs cash for operational expenses such as raw materials, labor, and overhead costs, but is currently cash-strapped. However, the company is capable of delivering 1,000 units of its product after three months.

  1. Contract Initiation: The company and the bank enter into a بيع سلم. The bank agrees to pay $500,000 upfront to the company for 1,000 units of its product to be delivered at the end of three months.
  2. Salam Transaction: The bank provides the entire $500,000 at the beginning of the contract, enabling the company to handle its operational expenses.
  3. Utilization of Funds: The company uses the funds to procure raw materials, pay labor costs, and cover other overheads. The principle of mutual consent allows the company to decide on the best way to utilize the funds.
  4. Salam Delivery: Upon maturity of the contract, the company delivers 1,000 units of its product to the bank, fulfilling the Salam delivery principle.

In this case, the bank provides the necessary working capital for the company’s operations while upholding Islamic banking principles. Subsequently, the bank can either sell the products in the market or engage in a parallel Salam contract to ensure the products reach their final consumers.

salam contract

Background of Salam in Islamic Banking:

Before the prohibition of interest, farmers used to get interest-based loans to harvest; and caravans for purchasing commodities. After the prohibition of interest, they both were allowed to do this contract, to get money in advance.

1. Salam as an Ancient Form of Forward Contract:

When Prophet Muhammad (Peace Be Upon Him) migrated from Makkah to Madinah, it was found that people used to pay in advance for fruits and dates. Which are delivered within one, two, and three years. However, such a sale was carried out without specifying the quality, measure, weight of the commodity, or the time of delivery. So, the Prophet Muhammad (Peace Be Upon Him) ordained that:

“Whoever pays money in advance for fruit to be delivered later, should pay it for a known quality, specified measure, and weight of dates or fruit of course, along with the price and time of delivery”.

2. بيع سلم and General Rules for Sale in Islam:

According to general Islamic Shariah rules, a sale must fulfill the following three conditions. However, only the Salam and Istisna are exceptional from these conditions:

  • Commodity for sale must exist;
  • The seller should acquire ownership of that commodity; and;
  • The commodity must be in the physical or constructive possession of the seller.

3. Risk Management in Salam Transaction:

Managing risk in Salam transactions requires understanding potential threats and implementing mitigation strategies. These may include default, delay in delivery, price fluctuation, and non-conformity of goods. Mitigation methods encompass thorough due diligence, employing parallel Salam for price risk, stringent quality checks, and clear contract documentation. Integrating risk management in business strategy allows the proactive handling of uncertainties in Salam banking, ensuring transaction stability and success.

4. A Key to Success in Islamic Banking:

In the field of Islamic banking and finance, a variety of high-level educational opportunities exist, underscoring the sector’s intricate complexity and vast potential. An Islamic Banking and Finance PhD, for example, provides an in-depth exploration of the principles and mechanisms unique to this domain. The MSc in Islamic Banking and Finance, on the other hand, offers a comprehensive understanding of Islamic financial operations, equipping graduates with the necessary tools to navigate and innovate within this sector.

For professionals already in the field, a Postgraduate Diploma in Islamic Finance and Banking can be an ideal avenue for skill enhancement. Moreover, securing an Islamic finance qualification or participating in Islamic finance training can be crucial stepping stones in carving a successful career in this space, ensuring proficiency in the principles of Islamic financial contracts.

salam in Islamic banking

Role of Salam and Parallel Salam Contracts:

In conclusion, the بيع سلم and Parallel Salam contracts offer a distinctive, ethical, and efficient mechanism for capital financing within the scope of Islamic banking. They establish a seamless cycle that empowers businesses, safeguards banks, and accommodates end consumers. The innovative implementation of these contracts ensures upfront capital for businesses, facilitates risk management for banks via Parallel Salam, and ultimately, ensures the availability of goods for the end consumer. By adhering to the principles of risk sharing, mutual consent, and elimination of uncertainty, these contracts embody the essence of Islamic banking, merging economic viability with ethical considerations. Hence, the contract and its parallel counterpart play a pivotal role in contributing to a more equitable and ethical financial landscape.